How We Became Small Enough to Fail

David Weidner takes a look back at how banks influenced bankruptcy reform five years ago, and the role it's played in this crisis. "Here's why the rash of Chapter 7 filings is alarming: under the 2005 law, only debtors with incomes under their state's median income qualify. Debtors who make more than the median income can qualify too, if they pass an onerous "means test." In other words, the economy has taken such a hard toll on poorest Americans, their debts have become so deep, they're easily able to qualify for Chapter 7, even though banks were able to create higher hurdles for that more drastic step. The fallout from the reform doesn't end there. A study by the New York Federal Reserve Bank in November found that the new bankruptcy law actually fueled the financial crisis by precipitating subprime mortgage defaults by as much as 128,000 a year. "